Tuesday, August 19, 2008

A Wall Street Journal article yesterday focused on manufacturers’ efforts to limit discounting by retailers by enacting and enforcing resale price maintenance restrictions. In the summer of 2007, the Supreme Court issued an important decision that provides significantly more flexibility under federal law for manufacturers to influence retail prices through the use of minimum resale price maintenance policies. In Leegin Creative Leather Products, Inc. v. PSKS, Inc., the Supreme Court held that agreements between manufacturers and retailers that set minimum retail prices would no longer be considered per se illegal under federal antitrust law – i.e., illegal on their face. Rather, these agreements will now be assessed under federal law using a more flexible “rule of reason” analysis, an analysis that incorporates an agreement’s business justifications and market effects. As we have previously discussed here, Leegin will likely spawn new strategies designed to better align retail prices with brand objectives.

On-Line Retailer Discounting Dispute: In the wake of Leegin, the Wall Street Journal article summarizes a dispute involving on-line retailers of maternity and baby products. BabyAge.com and BabyCatalog.com Inc. filed an antitrust lawsuit against six baby-goods manufacturers and the retailer Toys “R” Us Inc., parent company of Babies “R” Us. The plaintiffs’ original complaint (.pdf) was filed in late 2005 and amended in late 2007 (the amended complaint was filed under seal and is not electronically available). The suit alleges that Babies “R” Us monitored competitors’ on-line prices and reported violations of the manufacturers’ minimum pricing rules. This reporting allegedly resulted in the manufacturers discontinuing shipment of products to BabyAge.com and BabyCatalog.com. The suit also alleges that Babies “R” Us canceled orders for one manufacturer’s products until the manufacturer enforced minimum pricing restrictions against on-line retailers. A related class action lawsuit (.pdf) also has been filed against the same defendants in the BabyAge suit.

Other Resale Price Maintenance Updates: In May 2008 attorneys general from 35 states (which have state counterparts to the federal antitrust laws) sent a letter to Congress urging passage of a draft bill (pending in the Judiciary Committee) to reinstate the per se illegal ban on any minimum resale price maintenance strategies. Also in May 2008, as previously reported here, the FTC modified a prior consent decree that precluded Nine West Group Inc. (a women’s shoe manufacturer) from enacting any minimum resale price maintenance strategies. In June 2008, the Third Circuit found in Toledo Mack Sales & Serv. v. Mack Trucks, No. 07-1811, 2008 WL 2420729 (3d Cir. June 17, 2008) (.pdf) that a resale price maintenance program raised a triable issue of fact under the rule of reason, and remanded the case for trial to assess whether complaints by dealers caused the manufacturer to impose and enforce resale price maintenance restrictions, and whether there were anti-competitive effects.

Commentary: While the legality of minimum resale price maintenance strategies following Leegin continues to be debated, manufacturers are increasingly enacting strategies to limit retailers’ ability to discount prices below a minimum price threshold. According to BabyAge.com, nearly 100 of its 465 suppliers now dictate minimum prices. We have also heard from a number of contacts in the industry that restrictions on minimum advertised prices (as well as minimum prices themselves) are becoming increasingly prevalent. Industry stakeholders enacting or affected by resale price maintenance strategies need to be aware of several considerations critical to assessing the legality of the strategies:

Unilateral vs. Collusive Action: Both the Supreme Court in Leegin and the FTC in its Nine West order emphasized the anticompetitive risk of a manufacturer enacting – or enforcing – resale price maintenance restrictions at the behest of one or more retailers. A decision to impose or enforce such restrictions should be made by the manufacturer alone, not in response to a retailer that is competing against an aggressive discounter. The BabyAge.com lawsuit (and related class action suit) focuses on the extent to which resale price maintenance strategies were the product of unilateral decisions by the manufacturers or collusive action by the manufacturers and a dominant retailer, Babies “R” Us.

Legitimate Business Justification: Under federal law (following Leegin), resale price maintenance restrictions that are unilaterally enacted must be supported by a legitimate business justification – i.e., a justification that enhances a product’s ability to compete on the basis of service, quality, or price. As we have previously written here, examples of legitimate business justifications could include (1) encouraging product support investments, (2) reversing base sales declines, and (3) supporting brand positioning.

Anticompetitive Effects: Following Leegin, the legality of a resale price maintenance restriction that is unilaterally enacted and has a legitimate business justification will almost certainly depend on the extent to which the restriction led to higher retail prices throughout a category. Higher retail prices for the majority of product sales within a category may be viewed by a court as an “anticompetitive effect” of a resale price maintenance restriction. A court would balance any such anticompetitive effect against legitimate business justifications to determine the legality under federal law of the strategy.

Level Playing Field: Resale price maintenance restrictions should be evenly administered across competing retailers. If a manufacturer enables certain retail outlets – such as club stores, which tend to discount aggressively – to discount below a competing retailer’s minimum price point, the competing retailer will be competitively disadvantaged and may have a viable antitrust claim against the manufacturer.

State Antitrust Laws: Many individual states have their own antitrust laws. States tend to follow legal developments of federal antitrust laws, as state antitrust laws tend to be modeled after federal law. Therefore, most states will likely adopt the principles of Leegin in assessing resale price maintenance restrictions. But certain states may reject the Leegin decision and continue to view such restrictions as per se unlawful. Indeed, as previously reported here, in March 2008, attorneys general from New York, Illinois, and Michigan filed a complaint against and entered a consent decree with a chair manufacturer that imposed minimum pricing restrictions with retailers. This action, coupled with the attorneys general letter to Congress (discussed above), suggests that assessment of state laws – and enforcement of the laws by attorneys general – will be an important consideration for stakeholders implementing or affected by resale price maintenance restrictions. A useful chart to assist in understanding applicable state laws governing resale price maintenance is available here.

Conclusion: While resale price maintenance can benefit manufacturers, the complex and evolving nature of the law in this area requires them to think twice – and consult with legal counsel – before imposing minimum prices on retailers.

About Me

Daniel Low, Esq.

After litigating cases related to in-store consumer packaged goods ("CPG") marketing, I became interested in issues related to the CPG industry, including CPG-related advertisers and retailers. This blog is intended to inform readers about relevant legal developments that affect the industry.
I graduated from Yale Law School, clerked for a federal appellate judge, was a trial attorney at the U.S. Department of Justice, and worked at a top D.C. litigation firm. I joined Daniel Kotchen in founding the civil litigation firm Kotchen & Low LLP, which specializes in issues related to the consumer goods and retail industries.

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Daniel Kotchen, Esq.

Mr. Kotchen is a litigation attorney licensed to practice in Washington, DC and Wisconsin. He is a founding partner of the law firm Kotchen & Low LLP, and has worked at the FTC, has worked as in-house counsel for a major CPG, and has worked at top litigation firms in DC.

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